Estate Planning: The 3 Basic Things Entrepreneurs Must Do Before It’s Too Late
Estate planning? Estate planning?!?! For entrepreneurs?!?! Seriously? Why?
Because stuff happens. People unexpectedly get hit by buses, fall off of cliffs, and have heart attacks. And sometimes those people are entrepreneurs who have businesses and children and dogs. When stuff happens to these people, a void is left that should at least be briefly considered in advance.
Estate planning for entrepreneurs starts with context. Does the business and/or family situation warrant the time and cost of estate planning? Here are two simple rules of thumb:
- Is the business (or businesses) making money or booking substantial investment?
- Does the entrepreneur have a child?
If the answer to either of these questions is yes, then it is probably worth at least considering a basic estate plan. Consider this parade of horribles.
Peter (who just had his first child with his wife, Ann) and his two co-founders are getting major buzz and gaining real traction with their startup (a social network for social network startup founders). They just took on a $2M angel follow-up round and they’re being courted by several potential suitors who want to buy the company. They just need to get the company through the next 12 to 18 months at its current pace to bring home a $30M payday. One morning, Peter is hit by a cab on his bike ride to the office. Peter is now legally incompetent to manage his own affairs and can’t continue working for the company.
Questions abound after Peter’s accident. Who now controls Peter’s shares in the company? Will Peter’s family benefit from the momentum of the company if the co-founders can make things work? Are Peter’s co-founders losing both Peter’s services and a rational fellow business decision maker?
Without a basic estate plan, Peter’s wife is the most likely candidate to take over his affairs. Except, she’s not a great business decision maker (more of an artist). Oh, and she’s also going to be subject to the discretion of the Probate Court overseeing Peter’s estate who heard of “the Facebook channel” only a few weeks ago from her grandchildren. That judge has the authority to force Peter’s wife to try to sell his stock or make unreasonable demands on the business. To add insult to injury, the two remaining co-founders can’t vote their shares as an influential block any longer without Peter’s shares.
Peter probably should have had the basics in place, including:
- A basic “living trust” to own Peter’s stock. Peter controls the stock, while he is competent, through the trust in the same way as he did when he owned the stock outright. The trust would nominate one or both co-founders to control and vote the stock after Peter’s accident. The trust avoids the need for Peter’s wife to go to court to obtain legal authority over the stock.
- A basic shareholder agreement to determine (a) what happens in case something happens to a co-founder (buyout, status quo, etc.) and (b) to fairly treat Peter, his family and the business if Peter becomes disabled or dies (setting a price and payout period for buy-out).
- Some inexpensive term life insurance to provide liquidity to the company for either (or both), a buy-out in case of Peter’s death or to replace Peter’s lost talents with someone new.
For entrepreneurs whose family or business circumstances warrant it, thinking about these basics can be absolutely vital to protect what has been built and to treat everyone fairly — because stuff happens.